China: Cargo Delivery By Port Authority – Dilemma Resolved

Tuesday, 06 August 2019 | 00:00

Liaoning High Court recently issued a judgment ending a six-year legal battle over a consignment of iron ore stored in Dalian Port. The judgment addressed a tricky issue: where the warehouse receipt holder is different from the bill of lading holder, and both parties claim delivery of the cargo from the port authority, which party’s rights prevail, and, accordingly, to whom should the port authority deliver the cargo?

Facts

On 5 January 2012, Shenyang Orient Iron & Steel Co. Ltd (“Orient”) entered into a warehousing agreement with Dalian Port, in which both parties agreed that Dalian Port would store, keep custody of, and transfer Orient’s imported iron ore, in Dalian port, over 2012 and 2013.

On 21 February 2013, Sinochem International (Overseas) Pte Ltd (“Sinochem Overseas”), the seller, entered into a sale contract with Orient, the buyer, in which Sinochem Overseas agreed to sell iron ore to Orient. The parties agreed that, upon the seller receiving payment for the cargo under a letter of credit, title to the cargo would be transferred to the buyer.

On 25 April 2013, Orient ordered a cargo of iron ore which arrived at Dalian Port, however, Orient failed to pay the corresponding customs tax. Orient subsequently advised Sinochem Overseas, verbally, that it would not pay for the cargo.

In this context, on 30 September 2013, Sinochem Overseas agreed to sell the cargo to Sinochem China. Both parties agreed that title to the cargo would be transferred to Sinochem China, which would take delivery of the same. Sinochem China then obtained the original bills of lading from Sinochem Overseas.

Subsequently, Sinochem China collected the delivery order from Dalian port’s shipping agent and paid the customs tax. However, Sinochem China’s request to take delivery of the cargo was rejected by Dalian Port.

CRM’s cargo purchase
Between 13 December 2012 and 30 May 2013, CRM, as buyer, entered into several iron ore sale agreements with Orient, as seller. CRM subsequently paid Orient for the cargo, and title to the cargo was transferred from Orient to CRM.

On 1 January 2013, CRM entered into a warehousing agreement with Dalian Port. The agreement provided that CRM would store its imported iron ore in Dalian Port’s warehouse, and CRM, as cargo owner, would be entitled to take delivery of the iron ore at any moment.

In April 2013, as the quality of CRM’s previously purchased iron ore failed to meet CRM’s requirements, Orient and CRM reached an agreement whereby CRM would return previously purchased iron ore to Orient, and Orient would redeliver new iron ore to CRM. The iron ore Orient intended to redeliver included the 25,828 metric tons carried by mv “BLUE MOON”. On 2 July 2013, CRM and Orient formally entered into a written agreement.

On 31 August 2013, Dalian Port issued a warehousing receipt to CRM indicating that CRM had stored iron ore at Dalian Port’s warehouse. The inventory included the 25,828 metric tons carried by mv “BLUE MOON”.

Shanghai Courts
In December 2012, Sinochem China initiated legal proceedings against Orient claiming ownership of the cargo carried by mv “BLUE MOON”. In July 2013, Shanghai Pudong District Court issued a judgment in favour of Sinochem China. Orient filed an appeal, which was dismissed by Shanghai No. 2 Intermediate Court, in March 2015.

Dalian Port argued there was no warehousing agreement between Dalian Port and Sinochem China, and, therefore, Sinochem China had no legal basis to request that Dalian Port deliver the iron ore to Sinochem China.

CRM subsequently joined the DMC proceeding as third party, arguing that it had purchased the iron ore from Orient, and the warehousing receipt issued by Dalian Port indicated that title to the cargo had been transferred from Orient to CRM. Therefore, Dalian Port should deliver the iron ore to CRM as per the warehousing agreement and warehousing receipt.

Judgment

Dalian Maritime Court
In mid-2015, DMC held that Dalian Port should deliver the iron ore to Sinochem China within 10 days of the judgment coming into effect. The main reasons were: (1) Sinochem China had obtained the delivery order and had paid the customs tax; (2) All the Shanghai court judgments held that Sinochem China was the cargo owner; (3) Dalian Port was supervised by the customs authority and had to deliver the cargo to the party which had obtained the customs’ approval. As this mandatory obligation went against the Port’s obligation to deliver the cargo to the warehousing counterpart, the warehousing agreement was held to be unenforceable; (4) As Dalian Port would not perform the warehousing agreement, it had to follow the instructions of the cargo owner, in this case, Sinochem China, and deliver the cargo to it, accordingly.

Both Dalian Port and CRM appealed to Liaoning High Court.

Liaoning High Court
Liaoning High Court recently dismissed Dalian Port and CRM’s appeals on the grounds that: (1) Sinochem China was both the bill of lading holder and the party which had completed the customs clearance, and, also, the cargo owner according to all the Shanghai Court judgments; (2) Orient had never collected the bill of lading and completed the customs clearance. Orient had never owned the cargo. As Orient had not delivered the cargo to Dalian Port, Dalian Port could not refuse to deliver the cargo to Sinochem China.